Academic journal article Journal of Accountancy

Valuing Gifts of Closely Held Stocks

Academic journal article Journal of Accountancy

Valuing Gifts of Closely Held Stocks

Article excerpt

As with any other gifts, when corporate stock is given as a gift, the stock must be valued (and any applicable gift taxes paid). Therefore, the issue of the stock's value is a critical one. And when the gift involves stock in a closely held corporation--which doesn't have a readily available, easily ascertained market value--the determination of the gift's value is even more important.

VALUATION PRINCIPLES

The Internal Revenue Service guidelines for valuing stock in closely held corporations are very general. Basically, the business's value is determined first, and then the value of the stock interest in that business. In general, determining the value of the business is based on a determination of the fair market value of the business's assets, capitalization of its earnings or an analysis of its dividend-paying capacity.

Valuing a business. The first step in the process of valuing a stock interest in a closely held corporation is valuing the entire business. Once this is done, a specific value for the particular interest in the corporation can be examined.

The factors used in this determination include the company's net worth (the fair market value of its assets), its prospective earning power, its dividend-paying capacity, the economic outlook of the company's industry, the company's position in the industry and company management.

Valuing a stock. Once an overall value for a closely held company is determined, the value of the actual stock interest must be determined. (Usually, because of the nature of the corporate structure and the lack of a ready market for the closely held company's stock, this value is lower than the proportionate share of the company's assets. Factors that are considered in this determination include the degree of control represented by the amount of stock to be valued and the value of stock of companies engaged in the same (or similar) lines of business that do have a readily ascertainable value (those that are listed on a stock exchange).

DISCOUNTS

Once a dollar value for closely held stock is ascertained, the determination is not necessarily complete. …

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